Cyprus Parliament Deposit Tax Vote Fails; ECB Reaffirms Liquidity

By Dimitra DeFotis

Stock indexes were down just fractionally after lawmakers in Cyprus voted against a proposed tax on bank deposits that is crucial to avoiding default.

Update: Bloomberg and Dow Jones Newswires are reporting that the European Central Bank reaffirmed “a commitment to provide liquidity as needed within existing rules.”

Late Tuesday, 19 of the 56 Cypriot parliament members abstained from voting, but a majority voted against the proposed tax rates. The nation’s banks are on holiday until Thursday.

“Ultimately, the plan is likely to pass, since the alternative for Cyprus is total economic collapse,” says David W. Rossmiller, head of fixed income at Bessemer Trust. ”Cyprus’s banking system is eight times larger than its annual GDP, thanks in large part to foreign depositors seeking high yields and an easy regulatory environment. Many newscasters have been oddly polite in not mentioning that, because of lax money laundering controls, Cypriot banks are a notorious destination of Russian oligarchs’ ill-gotten fortunes. Euro-zone policymakers are not eager to bail out depositors in this case. “

The Dow Jones Industrial Average fell 15 points, or 0.1%, to 14,437. If the Dow falls for a third day, it would mark the longest stretch of negativity since December. The Standard & Poor’s 500-stock index declined six points, or 0.4%, to 1546. The Nasdaq Composite Index retreated 16 points, or 0.5%, to 3221.

Reuters

Shares of Boeing (BA) continued to hold their own, but just barely, after the company announced a fresh order for planes. Chesapeake Energy (CHK) is down more than 5% after a downgrade by Sterne Agee.

The draft bill in question would not levy a tax on Cypriot savers with less than €20,000 (about $26,000) in their bank accounts, and that development on Monday seems to be at the crux of the problem. Depositors with between €20,000 and €100,000 are to pay a 6.75% rate, and those with more than €100,000 would pay 9.9%. But with some depositors not paying, the bill being considered falls “€300 million short off the €5.8 billion revenue target the euro zone and the International Monetary Fund had demanded,” according to a Wall Street Journal report.

“a nice run so far this year … it could cause people to say ‘maybe I’ll take a bit of profits’ … There’s a fear that, if you’re going to tax bank deposits, people are going to withdraw their money and have a run on the banks…Nobody anywhere in the world likes to hear that.”

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